Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Reporting of foreign partnership income
Filling out a T5 supplementary is not appropriate; sufficient information need to be provided to the beneficial owners of the partnership interest for them to include their share of the partnership income on their tax returns.
Partners of a limited partnership are considered to carry on the business of the partnership and therefore should report their share of the partnership income as business income.
May 4, 1998
Re: Reporting of Foreign Partnership Income
We are writing in reply to your letter of December 20, 1997 in which you enquired about how you should report income distributed by U.S. limited partnerships to Canadian residents where you hold the interests of those partnerships in trust for the Canadian residents. You mentioned in your letter that the U.S. withholding tax rate on the limited partnership distributions is 39.6%.
A Canadian resident limited partner of a U.S. limited partnership is required to include his or her share of the income of the partnership in computing his or her income for Canadian tax purposes. Such income should be computed in accordance with Canadian tax law (i.e., the income calculated under the U.S. rules should be adjusted for Canadian tax purposes). Since the limited partner must report his or her share of the partnership income, he or she will not be required to include in computing income his or her share of the partnership distributions.
As you hold partnership interests in trust for your clients, your clients would need sufficient information for them to comply with Canadian tax law -- information such as their share of income or loss of the partnerships of which your clients are limited partners computed in accordance with Canadian tax rules and their share of the U.S. tax withheld with respect to the distributions from the partnerships. In this regard, it is not appropriate to use a T5 supplementary to report such information.
While you should consult with the officials of Internal Revenue Service of the U.S. (the “IRS”), it is our understanding that the U.S. withholding tax on the partnership distributions is not the final tax for U.S. tax purposes. In addition, it appears that your clients’ share of the limited partnership income would be taxed in the U.S. at progressive tax rates as it appears that the partnerships were considered to be engaged in the conduct of a trade or business within the U.S.1 The U.S. withholding tax on the partnership distributions would be treated as a refundable credit under subsection 1446(d) and section 33 of the Internal Revenue Code for U.S. purposes. In other words, if the U.S. tax on the share of partnership income is less than the withholding tax, the overpayment would be refunded to the limited partners after they have filed their U.S. tax returns.
Canada would provide a foreign tax credit under the Income Tax Act for U.S. tax which was required to be paid and was actually paid. As noted earlier, such U.S. tax actually paid may be less than the withholding rate.
As mentioned above, it may be beneficial to consult with the IRS for an explanation of their basis of taxation as residents of Canada may be entitled to relief from U.S. taxation under the Canada-U.S. Income Tax Convention on their share of income of the limited partnerships which is not attributable to a permanent establishment of the partnerships in the U.S.
We trust that you will find the above to be of assistance.
Reorganizations and International Division
Income Tax Rulings and
Policy and Legislation Branch
1 We assume that U.S. limited partnerships are engaging in the conduct of a trade or business in the U.S. since it is our understanding that, under section 1446 of the Internal Revenue Code (the “Code”), the U.S. withholding tax rate of 39.6% is only applicable to partnerships having taxable income effectively connected to a trade or business within the U.S.
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